George Soros, do you know him?
I guess I do. Everyone remembers that episode in the early 90’s when George Soros attacked the Bank of England to earn 1.1 billion dollars when the Bank of England was almost ruined.
Well, on the evening of the 2008 financial crisis, George Soros declared that this crisis marked “the end of an era of credit expansion based on the dollar as the international reserve currency” in his book “The Crash of 2008 and What it Means: The New Paradigm for Financial Markets.”
The facts have proven him wrong so far…
Even today, the appetite to hold US dollars is growing in the face of the energy shock and hyperinflation. The sanctions against Russia in retaliation for the invasion of Ukraine, and in particular the expulsion of Russian banks from the SWIFT payment network, underline once again that in the event of a major disagreement, the whole world aligns itself, willingly or not, with American interests.
A relative but real powerlessness
Accustomed to its pariah status, Moscow has decided to invoice its energy exports in rubles to support its currency. But this solution is not permanent, given the refusal of several countries, particularly in Europe, to make such a compromise. Similarly, the project to bring together MIR and UnionPay, the Russian and Chinese payment systems, is, by definition, limited in its applicability.
Beijing is also familiar with the retaliatory practices that the West sometimes uses. In 1989, following the Tiananmen Square incidents, China was excluded from the credit markets. The country was unable to counteract the ostracism that lasted for several years.
Today, as a result of its growing role in international trade, China is increasingly positioning itself as the champion of emerging countries, forming a non-aligned bloc around a sprawling infrastructure as part of the Belt and Road Initiative (BRI). Such a project, however, requires access to a reliable and unconditional method of payment.
Since the U.S. dollar’s convertibility to gold was abandoned in 1971, the greenback has been the cornerstone of the international monetary system — three-quarters of China’s trade is invoiced in this currency and therefore dependent on the SWIFT network. This American supremacy subordinates other countries to Washington’s whims and mood swings.
But remedial tools may soon emerge. The technological advances of the last few years should allow the implementation of autonomous payment mechanisms.
A digital solution
The People’s Bank of China wants to introduce its digital currency. The initiative is not unique: many countries are preparing to launch a digital currency in the next decade.
This would not address the risk of unilateral sanctions. Indeed, these projects would take the form of central bank digital currencies (CBDCs), disintermediating depository banks and giving central banks — that is, in most countries, the state — full powers. Any counterparty wishing to deal with China, for example, would be dependent on Beijing’s wishes, which would effectively control the settlement of digital renminbi transactions.
But such a structure would neutralize any economic reprisals from a third country by allowing, among other things, to bypass SWIFT. It would therefore be dissociated from the geopolitical context.
Until now, the control of the reserve currency placed the United States at the center of the world financial scene. CBDCs would guarantee permanent and uninterrupted access to a payment system independent of SWIFT.
In 1989, faced with international sanctions, Deng Xiaoping expressed his helplessness by quoting a Chinese proverb: “It is up to the person who tied the knot to untie it.”
China, Russia, and their partners should soon be able to untie the knot themselves, establishing a multilateral monetary order around digital currencies. Perhaps Soros was prescient. If not an end to the credit expansion our economies cannot live without, the current crisis is likely to be the death knell for the dollar standard.
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